Explaining upper secondary school dropout: new evidence on the role of local labor markets

Abstract

According to standard human capital theory, local labor market conditions affect individual schooling decisions mainly through two channels: (1) the opportunity cost of schooling, and (2) the returns to education. This paper assesses the impact of both these channels on upper secondary school dropout among Norwegian youth in the period 1994–2006. The effect of local labor market conditions is measured using variation in youth outflow rates from unemployment to employment across regions over time. The results show that local labor market conditions play a substantial role in individual dropout decisions in Norway, with elasticities ranging from 0.1 to 0.3. The opportunity cost of schooling seems to weigh more in the dropout decision for Norwegian youth than the expected returns. However, the results are highly sensitive to the choice of local labor market indicator. When including the unemployment rate, which is the standard indicator used in empirical applications of schooling decisions, instead of the outflow rate, the estimates become smaller and in most cases insignificant. This indicates that previous studies of school dropout may have understated the importance of local labor market conditions.